When I read this by Paul Katzeff in IBD:
Say you start in your twenties. Forty years later, if your retirement savings account averages a modest 6% annual rate of return compounded quarterly, you’ll have nearly $173,000 from those $20 a week additions to your retirement savings.
I was taken aback. Where in the world has he been getting a 6% return over the last 20 years? He hasn’t been getting it in the stock and/or bond market. In the 20 years from 1991 to 2011, the average investor realized 2.1%.
He didn’t get it from CDs. They’ve been below 5% for the last twenty years and below 3% for much of the last 15 years.
The only way he could get that kind of return on the entire original principal is by taking significantly higher risks. How much risk can a retirement portfolio stand?
Calculating returns over the last 91 years as he does is facetious in the extreme. And over the 20 year period from the mid-1960s to to the mid-1980s there were no gains at all. All of those gains are concentrated in a relatively few boom years. Averages mean nothing under the circumstances.
If that hypothetical investor started saving at age 20, she’s 111 now. The reason not to start your calculation over the last 20 years or even the last 30 years is that most of you’d miss the boom years.